Surging homeowner insurance and other homeowner costs fuel OER CPI, which is now hotter than rent CPI.

By Wolf Richter for WOLF STREET.

On a month-to-month basis, the “core” Consumer Price Index – which excludes the volatile food and energy components – rose by 0.31% (+3.8% annualized) in September from August, the third acceleration in a row, and the biggest increase since March, driven by suddenly rising prices of used vehicles, in what is a sharp flip from the steep plunges before, and stubbornly high inflation in services (blue line in the chart below).

The 3-month average “core CPI” rose by 3.1% annualized, the second month of acceleration in a row as the low reading in June has now fallen out of the 3-month average (not shown in the chart below).

The 6-month average – which irons out most of the month-to-month squiggles – eased to +2.6% (from +2.7% in the prior month) as it still includes the low reading in June (red):

Year-over-year, in summary:

• Core CPI accelerated for the third month in a row to +3.3% (red in the chart below).
• Core Services CPI decelerated a hair to +4.8% (blue).
• Overall CPI, driven down by plunging gasoline prices, decelerated to +2.4% (yellow)

“Core services” CPI.

Core services CPI decelerated to a still high +4.4% annualized in September from August, compared to +5.0% in the prior month (blue line in the chart below).

The 3-month core services CPI, which no longer includes the very low reading in June, accelerated to 4.4% (not shown in the chart).

The 6-month core services CPI, which still includes the low reading in June, decelerated to 3.7% annualized, the smallest increase since January 2022 (red).

The housing components of core services.

Rent of Primary Residence CPI decelerated to +3.4% annualized in September from August. It has been zigzagging up and down in the same range roughly all year (blue).

The 3-month rate accelerated a hair to +4.63% (from 4.56% in the prior month). After cooling a lot in 2023, rent inflation hasn’t cooled much this year.

Rent CPI accounts for 7.7% of overall CPI. It is based on rents that tenants actually paid, not on asking rents of advertised vacant units for rent. The survey follows the same large group of rental houses and apartments over time and tracks the rents that the current tenants, who come and go, paid in rent for these units.

The Owners’ Equivalent of Rent CPI has also been zigzagging up and down all year. In September, it decelerated from August to +4.1%, after two months of sharp acceleration (blue).

The three-month OER CPI accelerated to 4.9% annualized, the second month of acceleration in a row (red).

OER CPI indirectly reflects the now soaring day-to-day expenses of homeownership: insurance, HOA fees, maintenance, and property taxes.

It accounts for 26.9% of overall CPI. It estimates inflation of “shelter” as a service for homeowners – as a stand-in for the services that homeowners pay for, such as interest, homeowner’s insurance, HOA fees, maintenance, and property taxes. It is based on what a large group of homeowners estimates their home would rent for, with assumption that a homeowner would want to recoup their cost increases by raising the rent.

Homeownership expenses push up OER: OER indirectly covers the expenses of insurance, maintenance, HOA fees, and property taxes, whose now surging costs could continue to fuel OER, and could see to it that it continues to run hotter than rent CPI.

Year-over-year, OER v. Rent CPI. OER rose by 5.3%, the third month in a row of rising at this pace, having broken the trend of year-over-year declines (red line). But the CPI for rent decelerated to 4.8% (blue).

That OER runs hotter than rent is unusual. It reflects perhaps the reality that homeownership is now substantially more expensive on a month-to-month basis in the US overall than renting an equivalent home, and that these expenses (except mortgage rates) continue to surge far faster than rents.

“Asking rents…” The Zillow Observed Rent Index (ZORI) and other private-sector rent indices track “asking rents,” which are advertised rents of vacant units on the market for rent. Because rentals don’t turn over that much, the ZORI’s spike in 2021 through mid-2022 never fully translated into the CPI indices because not many people actually ended up paying those high asking rents.

For August, the ZORI rose by 0.22% month-to-month and by 3.4% year-over-year. Zillow has not yet released the ZORI for September.

The chart shows the CPI Rent of Primary Residence (blue, left scale) as index value, not percentage change; and the ZORI in dollars (red, right scale). The left and right axes are set so that they both increase each by 55% from January 2017. The ZORI was up by 52% from January 2017, and the CPI Rent was up by 40% over the same period.

Rent inflation vs. home-price inflation: The red line in the chart below represents the CPI for Rent of Primary Residence as index value. The purple line represents Zillow’s “raw” Home Value Index for the US [this is also the data set we use for our Most Splendid Housing Bubbles in America series]. Both indexes are set to 100 for January 2000:

Motor-vehicle maintenance & repair inflation spiked by 12.1% annualized in September from August (+0.96% not annualized), after months of deceleration. This pushed the year-over-year increase to 4.9%, the highest since June.

Since January 2020, it has spiked by 37% as labor costs of auto-repair technicians have surged, and as prices of replacement parts have surged.

Motor vehicle insurance inflation spiked by 15.2% annualized in September from August (+1.2% not annualized), and by 16.3% year-over-year.

Since 2022, it has exploded by 51% because motor vehicle repair costs surged, and because used-vehicle prices (replacement values) had exploded in 2021 and 2022. But then it continued to surge, even as used vehicle prices have dropped, because auto insurers fattened up their profit margins. For example, GEICO, Buffett’s Berkshire Hathaway’s auto insurance unit, reported big increases in premiums despite reduced costs of claims that caused underwriting profits to more than triple!

Food away from Home CPI – often called food services – includes full-service and limited-service meals and snacks served away from home, food at cafeterias in schools and work sites, food served at stalls, etc.

• In September from August annualized: +4.1%, an acceleration
• Year-over-year: +3.9%.
• Since January 2020: +28%.

Core services CPI overall has surge by 23% since January 2020.

Major Services ex. Energy Services	Weight in CPI	MoM	YoY
Core Services	65%	0.4%	4.9%
Owner’s equivalent of rent	26.9%	0.3%	5.2%
Rent of primary residence	7.7%	0.3%	4.8%
Medical care services & insurance	6.5%	0.7%	3.6%
Food services (food away from home)	5.4%	0.3%	3.9%
Education and communication services	5.0%	0.1%	2.3%
Motor vehicle insurance	3.0%	1.2%	16.3%
Admission, movies, concerts, sports events, club memberships	1.8%	-0.7%	2.1%
Other personal services (dry-cleaning, haircuts, legal services…)	1.5%	0.1%	4.1%
Lodging away from home, incl Hotels, motels	1.5%	-1.9%	-2.8%
Motor vehicle maintenance & repair	1.2%	1.0%	4.9%
Public transportation (airline fares, etc.)	1.0%	2.4%	0.6%
Water, sewer, trash collection services	1.1%	0.7%	4.8%
Video and audio services, cable, streaming	0.9%	0.0%	1.8%
Pet services, including veterinary	0.4%	-0.3%	5.6%
Tenants’ & Household insurance	0.4%	-0.5%	2.2%
Car and truck rental	0.1%	1.2%	-6.8%
Postage & delivery services	0.1%	-0.3%	5.2%

Durable goods.

New and used vehicles dominate. Other durable goods include information technology products (computers, smartphones, home network equipment, etc.), appliances, furniture, fixtures, etc. All categories have been experiencing price declines starting in late 2022, following the price spike during the pandemic. But the sharp month-to-month price declines in motor vehicles ended in September.

Used vehicle CPI flipped. In September, used vehicle prices did a massive U-turn, to an increase of 3.8% annualized (+0.31% not annualized), seasonally adjusted, from a series of month-to-month plunges — deep in the double digits (annualized) in 5 of the prior 6 months that added up to a historic plunge off an even more historic spike.

The plunge of used vehicle prices since mid-2022 from the crazy spike had been a powerful contributor to the sharp cooling of core CPI. But it has now ended. And this strong tailwind for cooling inflation has turned into a mild headwind.

We’ve been expecting this flip because wholesale prices – what dealers pay to replenish their inventories – flipped three months ago [we discussed this all along the way, most recently here: More Evidence this May Be the End of the Historic Plunge of Used Vehicle Prices that Had Pushed Down CPI].

This month-to-month rise reduced the year-over-year drop by half, to -5.1% (from -10% in the prior three months).

New vehicles CPI rose 0.2% (+1.9% annualized) in September from August, the second month in a row of small increases, after months of small declines. Year-over-year, the index fell by 1.3%.

Prices of new vehicles have been sticky after the blistering spike from early 2021 into early 2023 – unlike used vehicle prices – and have only given up a little ground since the peak, despite the glut of new vehicles on many lots, and amid calls for big incentives and discounts to move the vehicles. The index is up 19% from January 2020:

In the years before the pandemic, the new vehicle CPI zigzagged along a flat line, though vehicles were getting more expensive. This is the effect of “hedonic quality adjustments” applied to the CPIs for new and used vehicles and some other products (see our explanation of hedonic quality adjustments in the CPI).

Major durable goods categories	MoM	YoY
New vehicles	+0.2%	-1.3%
Used vehicles	+0.3%	-5.1%
Information technology (computers, smartphones, etc.)	-1.2%	-7.9%
Sporting goods (bicycles, equipment, etc.)	-0.3%	-2.3%
Household furnishings (furniture, appliances, floor coverings, tools)	0.0%	-2.2%

Food Inflation.

Inflation of “Food at home” – food purchased at stores and markets and eaten off premises – flattened out this year at a very high plateau, but in September rose again. The CPI for food at home is up by 26% since January 2020.

	MoM	YoY
Food at home	0.4%	1.3%
Cereals, breads, bakery products	0.3%	0.1%
Beef and veal	0.6%	4.2%
Pork	0.5%	1.5%
Poultry	-0.1%	0.5%
Fish and seafood	-0.2%	-1.3%
Eggs	8.4%	39.6%
Dairy and related products	0.1%	0.5%
Fresh fruits	2.2%	1.6%
Fresh vegetables	0.0%	0.2%
Juices and nonalcoholic drinks	-0.3%	1.7%
Coffee, tea, etc.	0.8%	0.2%
Fats and oils	1.1%	4.1%
Baby food & formula	1.2%	2.6%
Alcoholic beverages at home	0.1%	1.6%

Apparel and footwear.

Apparel and footwear are components of nondurable goods, along with food, energy products, household supplies, and other stuff.

Month-to-month, the CPI for apparel and footwear spiked by 1.8% (+15% annualized). This increased the year-over-year gain to 1.1% from a flat reading in the prior month.

The trend of deflation in the years before the pandemic seems to have ended:

Energy.

CPI for Energy, by Category	MoM	YoY
Overall Energy CPI	-1.9%	-6.9%
Gasoline	-4.1%	-15.3%
Electricity service	0.7%	3.7%
Utility natural gas to home	0.7%	2.0%
Heating oil, propane, kerosene, firewood	-3.1%	-13.0%

The CPI for energy covers energy products and services that consumers buy and pay for directly:

Gasoline prices, which account for about half of the energy price index, plunged in September from August, both seasonally adjusted (red) and not seasonally adjusted (blue). This was the big factor in driving down overall CPI:

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